Avinash Dixit | A supply-side response to corruption

Corporate entities can help tackle corruption by collectively refusing to pay bribes, says Dixit
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First Published: Sun, Feb 10 2013. 09 19 PM IST
Multiple clearances are a problem, particularly when such clearances are complementary to each other, as such systems generate uncertainty, says Dixit
. Photo: Hemant Mishra/Mint
Multiple clearances are a problem, particularly when such clearances are complementary to each other, as such systems generate uncertainty, says Dixit . Photo: Hemant Mishra/Mint
Updated: Mon, Feb 11 2013. 12 21 AM IST
Mumbai: Corporate entities can help tackle corruption in public life by collectively refusing to pay bribes, says Avinash Kamalakar Dixit, emeritus professor of economics at Princeton University. Dixit calls his approach a supply-side response to corruption in which the traditional bribe-givers initiate reform rather than wait for the government to act. Among the foremost economic theorists today, the 68-year-old Dixit was born in Mumbai and studied in St. Xavier’s College before moving to Cambridge and then to the Massachusetts Institute of Technology (MIT), where he started researching economics. His contribution to game theory is considered to be on par with that of the likes of the polymath John von Neumann and the troubled genius John Nash. His work with Joseph Stiglitz forms the bedrock of new trade theory, and his research on institutions helped in the growth of the field of new institutional economics. Dixit is one of the two Indian economists whose names figure in the list of possible contenders for the Nobel Prize almost every year. The other is Jagdish Bhagwati.
Dixit, who spoke in an interview on the sidelines of a lecture on corruption organized by the Indira Gandhi Institute of Development Research, argued for a graft-free union formed by business houses, in which members pledge not to pay bribes, and snap ties with any firm which does so. Edited excerpts:
Many expected economic reforms in India to greatly reduce the scope for corruption, but the actual record has belied such expectations. Some scholars argue that the reason behind this is that public officials continue to enjoy large discretionary powers since reforms in India have not been deep enough. Others argue that economic reforms in India actually underlined a pro-business rather than a pro-market shift, which allowed big businesses to gain disproportionately. What is your view?
I think both of these things are going on; it is not an either-or case. Reforms ended up being pro-business rather than pro-market competition, not just in India but in many other countries. That will remain a problem. At the same time, even though the deep basis of the license raj may be gone in the reformed situation, businesses still have to obtain a large number of permissions and licences to start operating. That leaves lot of scope for corruption.
Are the multiple layers of control and clearances the key problem?
Multiple clearances are a problem, particularly when such clearances are complementary to each other. Such systems generate uncertainty. Suppose you need 16 clearances. You may obtain 15 permits but the sixteenth guy may come and say that nothing works unless you pay me off. Also, the interaction between different departments involved tends to have a damaging impact. A nice parallel is the example of two businesses selling complementary goods such as hardware and software. If the hardware seller raises his price too much, it will depress the overall demand for computers and reduce revenues for the software seller. Something similar occurs when different bureaucracies are involved in providing multiple clearances, and each may end up asking for higher bribes, which will tend to reduce the overall number of businesses and the bribe collected.
A one-stop shop can remove such problems since the average bribe a business has to pay will be reduced, although the aggregate level of bribes paid will likely be higher because more firms will now be able to do business. To an extent, people are realizing the importance of this concept. I was told by businessmen here that on a pretty ad-hoc basis, Mr. (Narendra) Modi works on a similar model in Gujarat. Once he is convinced about the value of your business project, he will marshal all of his officials into one team that will deal with you. Maybe that team will still try to extract something from you, but that is better than having to deal with 16 departments separately. You need to institutionalize such systems.
In your paper on corruption, you argue for businesses to launch a graft-free union, in which members refuse to pay bribes and snap ties with any firm which bribes. What are the incentives for large businesses, which can secure competitive advantages through bribing, to create, or even be a part of such unions?
There are both incentives and disincentives for large firms. To the extent a large firm is large because it is more efficient, it will win contracts on merit. Corruption only harms it by raising the possibility of an inefficient firm bagging contracts, and a large business will then favour a clean system.
To the extent that a large firm is large because it has been able to develop connections with government officials, it may have little incentive to launch such a union. But even among such firms, there will be some firms that used bribery to win contracts and become large but have developed efficiencies over time, and may now prefer a clean system.
These are very tentative ideas, of course, but what might make such a system work is the presence of a large number of clean and big businesses which come together. Once that happens, even the corrupt firm will be forced to fall in line because not doing so will send the wrong signals.
Traditional economic models tend to under-emphasize the role of institutions in economic growth and development. Do you see that changing now?
I don’t even know if it was a battle in the profession, but if it was, that’s over. Just about everybody recognizes the importance of all kind of supporting institutions to ensure that market economies, or any economy for that matter, functions well. Also, there is broad agreement among those who write on institutions about what good institutions are, and what they are not.
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First Published: Sun, Feb 10 2013. 09 19 PM IST
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